G4S and its Keystone Cops: The Needle and the Damage Done?

GMI Ratings

Sep. 10, 2012, 4:53 PM

By Damion Rallis, Ratings Analyst

Amid the numerous scandals surrounding UK security and protection services company G4S, an important question has been posed: "How many more mistakes do[es] G4S need to make before alarm bells start ringing?" Behind closed doors G4S's well-coiffed CEO Nick Buckles must be muttering P.T. Barnum's famous quote to himself, "I don't care what they say about me as long as they spell my name right." Or maybe he's just reassuring himself that there's no such thing as bad press. While recent events at G4S are starting to come off as perversely comical, shareholders aren't exactly laughing as the company's market cap dipped over 17%—its share price plummeted from 290.40p on July 11, 2012 to 240p less than a week later—at the onset of the company's recent Olympic misstep. A closer examination of G4S's governance practices help to not only corroborate the company's current ESG Rating of "C" but may also indicate that its rating may be downgraded to a "D".

It would be one thing if recent negative events at G4S were run-of-the-mill, but G4S missteps have an almost tabloid-like unbelievability. On July 11,2012, a mere 16 days before the opening ceremony of the 2012 Summer Olympics in London, G4S admitted that they would not be able to deliver the numbers of security personnel that they had promised. One day later, the company announced that the British government would supplement G4S's inability to successfully recruit security personnel due to "unprecedented and very complex security recruitment and deployment exercise which is being carried out to a very tight schedule." A few days after that, in a testimony to the UK Parliament's Home Affairs Select Committee, Mr. Buckles agreed that the whole affair was a "humiliating shambles" and that the company's reputation was in tatters. Despite it all, Mr. Buckles held firmly to his belief that G4S should not waive its £57 million management fee.

In August 2012, it was reported that operations were suspended at a nuclear facility in the US for storing enriched uranium after the area was breached by three anti-nuclear protesters exposing gaps in security provided by G4S. The three protesters, which included an 82-year-old nun got as far as the outer wall of the uranium building and allegedly daubed it with slogans and splashed it with human blood. A former congressional investigator and security consultant to the US government said, "The significance is outrageous. If they were terrorists, they could have blown open the door and got inside." He said the security breach was the "worst we've ever seen" in connection with a US nuclear facility."

In September 2012, a new slew of bizarre and troubling allegations included the alleged rape of an 18-year-old G4S worker by an older colleague, instances of uniforms missing and stolen out of vans, and members of staff that merely "disappeared off the radar." Furthermore, recent claims also point to some misdeeds at the Lord's cricket ground in London where G4S staff was allegedly spitting in the tea of soldiers, stealing food, and smoking marijuana. In August 2012, G4S was fined $285K for its involvement in the death of an Australian Aboriginal elder being transported in a prison van. In March 2011, Scotland Yard considered bringing a corporate manslaughter charge against G4S over the death of Angolan deportee Jimmy Mubenga, who collapsed while being deported on a commercial flight from Heathrow. Witnesses told police they saw three G4S guards heavily restraining Mr. Mubenga and that he had been complaining of breathing difficulties before he collapsed. The investigation was controversially dropped in July 2012. A few days prior to this incident, a Columbian deportee needed hospital attention after G4S security guards escorted him on to a British Airways flight.

The operational missteps don't tell the whole story. In November 2011, G4S was forced to abandon its high profile $8.4 billion acquisition of Denmark cleaning services firm ISS, caving into pressure from investors who opposed the deal because of concerns over strategic and financing issues. The overwhelming opposition to the deal brought into clear view shareholders lack of faith in current management to execute on delivering its strategic vision.

Our primary criticism of G4S's board is its utter lack of expertise in security issues specifically and the security industry in general. Only one board member, Lord Condon, lists any type of skills or experiences commensurate with the role of board member at the world's largest security company. Furthermore, not only are three of the company's ten board members executive officers, but it is also noteworthy that in addition to Mr. Buckle's board role, he participates regularly in Nomination and Remuneration Committee meetings and chairs the Executive Committee. These features call into question the board's ability to act as an effective counterbalance to management. Overall, we sincerely hope the board's review includes the immediate need for new board members with extensive industry experience. At worst, such an announcement would at least be a first step in rehabilitating G4S's operational difficulties.

At this point, it would be hard to wonder if G4S's reputation has been tarnished; the real question is whether its reputation has been permanently tarnished? While the company continues to stress that its global pipeline of £3.8 billion of business is strong, there have already been dangerous signs of customer mutiny in the press recently. On Monday, a Hertfordshire police union said "it is 'extremely disappointed' that the county's force is still considering handing large swathes if its back office functions to the company G4S after the Olympics security fiasco." So where does G4S go from here? The company detailed in its Half Year Results last week that it expected losses on the Olympic contract to be in the region of £50m but that a board review was underway to ascertain its failures and lessons learned. But can we trust the board at G4S to perform an instructive review? Aside from the obvious distasteful nature of many of the incidents cited above, the frequency of such occurrences spread among a wide variety of failures, points to systemic risk that hints at revealing itself again in the future. The constant drone of these problems should push shareholders and the like to re-evaluate their investment thesis, as considering only traditional financial metrics leaves investors open to substantial non-traditional risks.